Danone, owner of Activia yogurt and Evian water, will spend about 325 million euros ($417 million) to form a joint venture and invest in China’s biggest dairy producer to expand its brands in the most populous nation.

Danone will have an initial indirect interest of about 4 percent in China Mengniu Dairy Co., with the aim of increasing that in the future, the Paris-based company said in a statement today. It will also set up a venture with Mengniu for yogurt products in China. Mengniu shares surged the most in four years.

The tie-up will help Danone boost sales in China’s yogurt market, which Euromonitor International estimates will grow 57 percent to 71.6 billion yuan ($11.7 billion) by 2015. Mengniu gains the investment as food scandals including contaminated baby formula, rat meat sold as mutton, and excessive antibiotics in chicken have fueled demand for better quality control in the world’s second-largest economy.

"The deal will help strengthen the research and development and capability of Mengniu’s yogurt business, and potentially help them increase market share in China," said Charlie Chen, a Hong Kong-based analyst at BNP Paribas Securities Asia. "Through its ventures with Arla and Danone, Mengniu is also building a better brand image among consumers."

Market Share

Mengniu closed 10.4 percent higher at HK$27.05 in Hong Kong trading today, the biggest gain since April 14, 2009. It formed a strategic partnership with Danish dairy firm Arla Foods in 2012 to improve quality inspection techniques and explore further co-operation. Danone shares were little changed at 58.03 euros as of 12:16 p.m. local time.

Today’s agreement is the first partnership for the French company in China since the end of the one with Chinese drinks maker Hangzhou Wahaha Group Co. in 2009, Agnes Berthet- d’Anthonay, a spokeswoman for Danone, said today. The companies were embroiled in more than 30 lawsuits as Danone accused Wahaha Chairman Zong Qinghou, now China’s richest man, of unlawfully selling Wahaha-branded juice and tea outside their partnership.

Mengniu and Danone first disclosed plans to form a venture to sell yogurt products in China in 2006, the Danone spokeswoman said. The companies terminated the tie-up a year later due to "administrative reasons" and left the door open for future collaboration, she said.

The local partnership will increase the reach of Danone brands in China, the Paris-based company’s Chief Executive Officer Franck Riboud said in a statement today. It will own 20 percent of the yogurt venture with the rest owned by Mengniu, according to the statement.

Market Share

Mengniu had a 16.8 percent market share in China’s yogurt market in 2012, with Danone holding a 1.6 percent share, according to Euromonitor.
Danone will benefit from Mengniu’s extensive distribution channels in China, and also possibly gain access to the Chinese dairy company’s production bases there, said Olive Xia, an analyst at Core Pacific-Yamaichi International Ltd. in Shanghai.

Danone, which sells Activia yogurt under the brand Bio and Dumex infant formula in China, operates 22 factories and employs about 10,000 employees in the country, according to its official website. The Asian nation formed about 6 percent of the group’s consolidated sales in 2012, its fourth-largest market after Russia, France and the U.S., according to the company’s 2012 annual report.

Food Safety

Danone Chief Financial Officer Pierre-Andre Terisse said last month that its first-quarter baby-nutrition revenue jumped 17 percent led by a need for "safety" in China and that exporting more from Europe to China isn’t sustainable.

Food quality and safety incidents affected consumer confidence and sales, Mengniu said in a March 27 statement. In 2008, Mengniu was among the 22 dairy companies found to have sold products containing melamine, a toxic chemical used to make plastics. The tainted milk killed at least six babies.

In 2011, the company said moldy cattle feed led to excessive toxin levels in its milk. Since then, the Hohhot, Inner Mongolia-based company has run marketing campaigns emphasizing product quality to draw consumers back.

Mengniu sells liquid milk products including UHT milk and yogurt under its namesake brand in China. It also produces ice cream and other dairy products such as cheese and milk powder. The company has the biggest share in China’s drinking milk market, controlling more than 34 percent share in 2012, according to Euromonitor International.

Mengniu this month agreed to buy 26.9 percent of China Modern Dairy Holdings Ltd. for HK$3.18 billion ($409 million) to gain greater control of milk supplies amid food safety concerns in the country.